Hidden Traps That Cause Startups to Fail — And How to Avoid Them

Venturing into the world of entrepreneurship can be exciting. But, the early days of a business are also the time when your venture is most vulnerable to failure. About 25 percent of startups fail within the first year, and 50 percent fail within the first four years, according to figures from Statistic Brain.

Neglecting Market Research

You’ll have plenty of ideas during the launch phase, andcoming up with brilliant ideas is part of startup culture. However, many of those ideas will be difficult to execute. Undertake some market research to determine whether you are moving into a profitable space or a saturated market, and whether you are just chasing a fleeting idea.

Guidelines for successful market research are pretty much the same around the world, and the Government of Western Australia’s Small Business Development Corporation has some good suggestions:

Identify potential customers

Learn about existing customer segments

Understand your competitors

Identify any pricing and promotion opportunities

The development corporation urges you to have a system in place to collect and analyze data so you can make informed decisions about your business venture. Without this type of data and information, it will be difficult to keep up with customer needs and the demands of the market. That can result in business failure.

Being Too Optimistic

It’s good for entrepreneurs to have an optimistic outlook, but don’t ignore red flags that can lead to business failure. The book “Write Your Business Plan” — written by the staff of Entrepreneur Media — emphasizes the importance of looking for errors in your business plan to avoid presenting “an overly optimistic view, especially of such elements as sales, cost, and profit margins.”

Startups typically rely heavily on projections and forecasts during the launch phase. During this process, it’s important to take a conservative stance and not always expect the best. Such a sober-minded analysis can prevent you from falling victim to the biggest business mistakes, such as depending on a skewed vision that might never come to fruition.

Hiring the Wrong People

You need a strong team to build your business and take it to new heights. Hiring the right people is critical to your success.Neglecting to review resumes in detail, forgetting to conduct background checks or failing to ask for references are startup mistakes that can have a negative impact on your business now and in the long run.

Make a list of traits you want in each employee so you can look for signs of these characteristics during the job interview. Consider a candidate’s personality as well as his experience, because he will work with a team of peers and need to be somewhat social to adapt to the environment easily.You can also work with a recruiter who can do the legwork to find the strongest candidates for a given position.

Believing There Is No Competition

Even if you’re the first to market or have stumbled into an untapped niche, there’s no guarantee you’ll be leading the way for long. If you’re just starting out, you probably do not have a lot of intellectual property, patents and trademarks — or even a proven business model — in your hands.

So even if you have a so-called “first-mover advantage,” any large company with a bigger budget and more resources can replicate your idea or business plan relatively quickly. That company can take the lead on anything you have already created and turn itself into your biggest competitor.

In fact, 72 percent of startup founders said their initial intellectual property was not a competitive advantage, according to the Startup Genome Report, co-authored by researchers at the University of California, Berkeley and Stanford University. So, if you’re the first to turn your hobby into a business, don’t get comfortable just yet.

Save for Your Future

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Work with the mindset that your competition is already out there. That viewpoint can help you make intelligent decisions that will protect your company, ideas and vision.Perform research to keep tabs on competitors and learn from them.

Scaling Too Soon

Seventy-four percent of high-growth internet startups fail because of premature scaling, according to Compass, which provides automated management reports and benchmarks for small- and medium-sized online merchants. On the other hand, startups that scale properly grow about 20 times faster than those that scale prematurely, Compass said.

Recently funded companies that attempt to grow by spending money too quickly might find themselves backtracking to recover those expenses. Instead, invest time and resources into generating revenue. The smartest thing you can do with funding is to continue generating revenue without increasing expenses significantly.

Owning your own business is exciting, but remain calm and focused when trying to grow your venture. Don’t scale up and spend more to spur growth until you’ve built a solid foundation and have reached a point of consistency in revenue per month, or per quarter. Scaling prematurely can set you back and leave you falling behind as you scramble to keep up with bills and stay ahead of the competition.

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About the Author

Sabah Karimi is an award-winning writer with more than 10 years of experience writing about personal finance, lifestyle topics, and consumer trends. Her work has appeared on U.S. News & World Report, Business Insider, Yahoo!, AOL Daily Finance, MSN, and other mainstream publications. She was interviewed by The Wall Street Journal and CBS News about her work as a freelance writer early in her career and now works with a variety of clients.

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